Algorhythm Holdings Inc (RIME) 2021 Q3 法說會逐字稿

Good day, everyone, and welcome to today's The Singing Machine third-quarter earnings call. (Operator Instructions) Please be advised this call may be recorded.

It is now my pleasure to turn the program over to Brendan Hopkins. Please go ahead.

Thank you, and thank you, everyone, for taking the time to join us today. We have a brief Safe Harbor, and we'll get started.

Except for historical information contained herein, the statements in this conference call are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause our actual results in future periods to differ materially from forecasted results.

With that said, I'd like to turn the call over to Gary Atkinson, CEO of The Singing Machine.

Thank you, Brendan. Good afternoon, ladies and gentlemen. I want to thank everybody for taking the time this afternoon to get an update on the results of our third quarter that we just released this morning.

I want to start off by saying we're obviously very, very pleased with the results from this third quarter, holiday quarter. It was a very, very strong quarter for us in which we were able to deliver on a lot of key performance goals. For instance, we were able to grow topline sales by 22% year over year for the third quarter. We were successful in being able to expand margin significantly, up to close to 30% for the quarter, and we were able to deliver a whopping earnings per share of $0.09 year to date and $0.03 for the quarter. So we're very, very pleased with the results.

We're excited to talk about them with you today. And with that being said, we'll be turning the call over to Lionel Marquis, who is the company's CFO. Lionel is going to be giving us a bit of some color and details behind the numbers. And then after that, we're going to turn it over to Bernardo Melo, who is our VP of Global Sales and Marketing, and Bernardo will give us an update on some of the good results that we saw over the holidays and talk a little bit about what we're seeing going into fiscal '22.

With that being said, I want to turn it over to Lionel.

Good afternoon, everybody. Just wanted to start off by talking a little bit about the amended returns. By now, you have probably seen an amended 10-K for fiscal year 2020, which covers both the fiscal years 2020 and 2019, as well as the amended 10-Qs for Q1 and Q2 of this fiscal year.

In reviewing our internal controls, we identified an issue relating to the way that we have been reporting co-op promotional allowance since the adoption of accounting standard code 606 which deals with revenue recognition from contracts. Essentially, we and our auditors determined that the co-op promotional allowances, which have historically been part of our operating and selling expenses, should have been classified as a reduction of revenue upon adoption of that code when we adopted it on April 1, 2018, for the fiscal year 2019. The amended returns that were filed reflect the collections that were made to be in compliance with ASC 606 with regards to co-op promotional allowance.

There was no change to net income or earnings per share nor was there any change to any of the financial statements as originally filed other than the income statement as was originally filed. The only change that occurred was a reduction in net sales in the amount of the co-op allowances and a corresponding decrease to operating selling expenses to the periods that were originally reported as subsequently amended by the filings.

So I'm about to review the results of Q3, and all changes were made to be in -- for both comparative years have now been made, including in this quarter. So what I'm about to tell you in terms of review is we are measuring apples to apples. We did restate the prior year and the current year. With that having been said, I'm going to proceed to the highlights.

Okay. Net sales for the quarter, we were up by $3,115,000, and year to date, we were up $4,758,000. Approximately $800,000 has to do with less cooperative promotional allowance. During the season, we did not -- this Christmas season, we did not participate in many of the co-op programs because of COVID.

A lot of them were extended, started in different periods. Plus, the demand was high. There was not a need or request to do those seasonal promotions as we normally do as large. So we picked up about $800,000 both year to date and quarter to date on that.

Our Carpool Karaoke sales, both for the quarter and for the year, we increased that by $1.5 million. We finally saw the results of this Carpool Karaoke taking off the way we thought it would last year. Had a little bit of a delay, but this year it was very, very strong.

And again, the only difference year to date is an additional $1.5 million worth of damaged goods that we had last year with a specific shipment that was damaged in transit. If you remember correctly, we didn't have that problem this year. So consequently, those were the highlights on net sales.

Our gross profit margin went from approximately $4,974,000 up from $2,371,000 last year. It's about a $2.6 million increase. About $600,000 of that increase for the quarter was due to the sales increase, less co-ops of -- in cooperative. Marketing allowances were down by $800,000. And there was also a margin pickup of $1.2 million, and a lot of that margin pickup had to do with the Carpool Karaoke product.

Sales increase for the year, year to date, we were $11,759,000 versus $7,805,000 last year, pickup of almost $4 million. There was a sales increase of approximately $1.0 million. There were less co-ops than there were last year of approximately $800,000. And there was margin pickup of approximately $2.1 million.

The gross profit percentage, 29.3% versus 17.1% last year. The CPK product or the Carpool Karaoke product yields a lot higher margin, almost twice the amount that normal products do. So with the increase in net debt, that gave us an increase for the quarter of approximately 5 margin points. The co-ops -- less co-ops, approximately $800,000, that contributed another 5 points on margin. And the remaining 2.2 points of margin were due to the product mix of what we sold and an increase in those items.

Year to date, 27.8% versus 20.8% in the prior year. That's approximately a 7-percentage-point pickup on the margins. Carpool Karaoke year to date contributed approximately 4 points. Cooperative marketing allowances, less the less $800,000, that contributed another 2 points year to date. And another point on product mix in terms of what we sold.

Selling expenses went from $1,741,000 last year to $1,491,000 this year, approximately $250,000 less than last year. Year to date, it was down by about $428,000, and it's primarily due to the Carpool Karaoke rollout that we did last year. We spent a lot of discretionary marketing pushing that product last year and getting it rolled in this year. It took off on its own, and we did not need to spend anywhere near that kind of money to promote it. So all the promotion on that was done last year.

General and administrative expenses, $1,925,000 this year versus $1,442,000 last year. It increased approximately $483,000 for the quarter. Most of it was in payroll, executive bonuses, some changes we made at the warehouse, some bonuses for our regular employees, some of it COVID-related.

We had some challenging times with COVID and personnel. A couple of bouts with COVID in our warehouse, where we had to shut down for a few days and get everybody tested and all that. So there was some extra incentive involved there, too, as well.

There was also a $78,000 increase in the California rent when we renewed our rental agreement for the warehouse space that we did. We were coming off of a six-year lease, and that rent went up substantially as space is at a premium out in California. Year to date, our G&A expenses were $5.1 million versus $5 million in the prior year. It was off about $82,000 year to date.

We did have the increase, like I said, in payroll by $386,000, but it was offset, okay, by approximately $346,000 of damaged goods that happened last year. We had some out-of-pocket expenses associated with that. So the payroll increase was offset by the fact that we didn't have any damaged goods charges to us in the current year.

Income from operations, $1 million, almost $1.5 million compared to $889,000 in the prior year, again, mostly in gross profit as was discussed earlier. Year to date, $3,160,000 versus a loss of $1,132,000, $4.3 million and, again, mostly gross profit margin as we discussed a few minutes ago.

Other income. For the quarter, we're $62,000 on our income for the month versus $108,000 deduction in the prior year. The interest expense increased $140,000. Again, we had to -- since we did our new deal with the financing situation, it cost us a lot more money than the deal that we had before. This was offset by $188,000 of one-time pickup from our related party, Cosmo, on some net sales that we had deemed not collected to them, not collectible to them last year, had written off, and we did -- we were able to pick some of that back up this year.

Year to date, $1,214,00 in other income net, okay, versus $166,000 decrease or loss, if you will, or expense, if you will, in fiscal year '20. It's approximately $1.4 million in other income: $1.1 million insurance recovery from that damaged goods that we had to eat last year. Approximately another $400,000 from concession or accounts payable extinguishment that we received from the vendor who caused the damage. Another 200,000 -- and again, $180,000 pickup from Cosmo, our related party. We also had an increase -- those things were offset by an increase in interest expense of approximately $265,000 year to date.

Net income, almost $1.2 million in net income versus a loss of $758,000 last year, so a pickup of $1.9 million. And year to date, we have almost $3.4 million in net income this year versus $1.3 million last year, a pickup of approximately $4.4 million. As you can see, most of those big one-time losses that we took last year, we were able to recover most of those this year. In fact, we recovered all of them this year. So you are seeing -- we're reaping the benefits of that this year from a cash flow perspective.

Inventory. A couple of things on the balance sheet of note. Our inventory last year at this time at the end of December was $8.1 million. Inventory is now at $5.3 million. So that's a drop of approximately $2.8 million in inventory, very positive. We had -- we ended up with a lot of excess inventory last year, a couple of million dollars' worth that we were able to move that and more this year. Probably even left a little money on the table. The demand for karaoke during this COVID period stay-at-home stuff was very strong.

We put that cash to good use. We had approximately about $6.6 million in accounts payable last year, owed to our vendors and stuff, and that has reduced to $3.9 million, almost $4 million currently or at the end of the period as of 12/31. So we took most of that cash that we generated from the inventory, paid off all the old debt from last year in terms of accounts payable. And we're able to stay current with our current vendors here.

So that's my report. It was very positive, and I'm sure sales will have plenty to say about some of the successes that we have.

Perfect. Well, thank you, Lionel. Very detailed report. We appreciate it.

We're going to turn the call over now to Bernardo Melo, VP of Global Sales and Marketing, for some more sales insight into what happened during the third quarter. Go ahead, Bernardo.

Yes. I just wanted to recap the third quarter and then the year in general. In the past, I've gone account by account and kind of given the highlights of those accounts. I just wanted to get into that a little bit and also leave some time for questions and answers at the end.

But so far this year, this fiscal year, we've really had a good year with our major retail partnerships. Some of the key retailers are strengthening their position with Singing Machine branding. And we've seen that all across. We're becoming more relevant to either the toy department or the consumer electronics department in those particular retailers.

For example, Target this year really had a banner year. They ended the year this year at 71% up year over year, calendar year. And a lot of that was attributed to -- they just -- they were one of the early winners in Carpool Karaoke. A lot of -- when the item got really popular in TikTok, everybody was tagging Target on it. And they happened to have inventory.

We were able to ship them some additional inventory. And that item took off. But it wasn't just a one-trick pony. We had huge success with our core karaoke items as well. And they carry a little bit of a higher price point.

Their entry level could be as high as $79.99. Their also -- their step-up unit is $149, and we didn't see a drop-off in any of those higher priced. As a matter of fact, they were big winners for us.

Unfortunately, we did transition out of Carpool Karaoke at the brick-and-mortar stores, but we came in with another handheld microphone that also stood its own. And for the year, about 25% of the business was done in that handheld microphone with Target, which allowed them to have -- to increase their gross margin by 13% to 15% and for us to also increase our gross margin in there. So it's a strategy that we want to take into fiscal 2022 as well that we're going to expand about -- with other retailers as well.

Amazon is another one of those retailers that benefited from people rushing to online to do their shopping. Singing Machine, again, continues to do really good numbers with Amazon. We were able to reduce our marketing expense drastically with Amazon while transitioning some of that expense into Amazon Marketing Services, AMS. And it totally paid out per the outflow as well.

We increased our margin there. We increased our presence there and didn't have to do a lot of promotions with either Amazon and Target this year. As a matter of fact, we didn't participate in Black Friday with Target and still maintained the same number of sales from year's end. So we were able to prove to them that this is not only a promotional category, that if marketed well and supported well with inventory in the store, the karaoke could perform for them.

As a matter of fact, Target even awarded us a holiday end cap where they brought in some [periodic] items within the electronic department and cross-promoted with the toy department. That performed really well, ended up selling through about 98% of that promotional end cap that was given. So we're looking to grandfather that in this year and only extend on it to see if we could get it to all stores this year.

So getting back to Amazon, the excitement is there. We're still showing really good numbers now in our Q4 with about 101% year over year from what we were doing last year. So the trend is continuing. There's not -- it wasn't just a 2020 number, the trend is really continuing moving forward. And as a matter of fact, if we had a little bit more inventory, we could probably even do those numbers higher.

As Lionel mentioned, we're coming out of the year with less inventory than we had last year. Not only that, but also good inventory. We've pretty much sold out through all of our end-of-life and sort of inventory. We sold out on that on 2020 without having to discount many of that. We were able to get full cost on a lot of those items.

So we're in a much better inventory situation right now due to the sales and the sell-through at key retailers like Costco, Sam's Club, and Target. We did not have to take overstock returns, and every day, very, very minimal. But we ended up just settling out because the inventory number was so low that we settled out on -- with some cash to not receive those overstocks. So that was extremely positive for us.

Another thing that happened was the launch of our new Pedestal unit, which is a WiFi-enabled unit. We didn't know how it was going to perform because it was going to be at a higher price point than what the clubs are used to carrying, about $30 to $40 higher than usual. And at the end of the year, we -- it performed really well. So we already have some early commitments for 2022 on that particular model actually going a little bit stronger for 2022.

Other things that -- other highlights for the year. We took back our Canadian distribution. We've done that now direct. So now we've established direct relationships with Toys"R"Us, with Costco Canada, The Source amongst others. And we're continuing to expand in that Canadian market. For previous years, that market was steadily going down for us. And in our first year taking it over, we increased business overall.

Other things in general to talk about. Europe still is a challenging situation for us. Our main UK distributor has seen a lot of competition from these handheld mics, so the numbers are off there in Europe. But we're hoping that with things opening up in Europe that that number could bounce back.

But our strategy for this year is just continuing to strengthen our business with our key retailers who have already started making some early commitments, knowing the challenges that are coming out of Asia. And so things are starting to shape up.

The other things that -- other highlights that I wanted to go over. Our direct-to-consumer business increased their sales this year. A lot of it was triggered by some affiliate partnerships that we had with some influencers and with a company called ALL DIGITAL. So they were promoting their items on TikTok, and we were selling them directly on our website.

Obviously, I talked about the inventory coming out much better, also in a healthier situation where a lot of the items are good, sellable, moving-forward inventory. And then gross margin was up, too, not only with the handheld mics. A big contributor to that was Carpool Karaoke and some of our party mics. But also the Pedestal was fully listed with no promotion for the most part, so that generated some good gross margins as well.

And that being said, I'll leave some of the highlights for Gary to kind of touch on, and then if you have some questions afterwards, we can discuss in the Q&A. I'll transfer over to you, Gary.

Okay. Thank you, Bernardo. Great job.

I do know we are kind of coming up close to time here, and I want to make sure people have an opportunity for questions. So why don't we open it up for Q&A now, and I'm sure we'll continue as people ask questions.

(Operator Instructions) Mike Schellinger, MicroCapClub.

I have a question on Carpool Karaoke. What can you tell us about the seasonality of that product versus the seasonality of your regular product line?

Yes, that's a great question. And I'm glad you asked it. Actually, one of the real positives of Carpool Karaoke was that it wasn't as seasonal as our traditional karaoke product. It actually -- the popularity of it actually launched in late March, early April. And then we had some really strong numbers during the summer.

And what we think was -- because the use of this product is mostly for cars, we think that parents were buying it for their kids. The kids were buying it to do it while they were doing either summer vacations or driving around in the summer. And then they continued right into fall and then holiday.

So right now, we're still seeing some strong numbers. We just launched it on costco.com, and it's launched to some good -- some pretty solid numbers without a promotion behind it. And also Amazon's numbers have remained pretty strong here in January and February.

So it seems that it's not as seasonal as our other items. And that's why we want to focus on expanding on the handheld mics, right, because those are our more year-round business.

And I think you also mentioned in the prepared remarks that there's going to be a refresh in Carpool Karaoke. When would we expect to see that?

Yes, we're looking to launch it -- we were going to launch it in early summer, but we're probably going to launch it now late summer, August, and that's to coincide with some of the retail set at the store. And also, we are planning another Prime Day promotion with Amazon on the 1.0 this year, so that we could send this into the 2.0.

And Prime Day is going to move up from October. The rumors are that it's going back to July. So after we enter -- we get through that promotion, then we're looking to launch sometime in August.

Okay. And then from a loan point of view, do you have an opportunity now to refinance with the great results you've put out in the past year here?

The answer to that is possibly. I'm checking into those possibilities now. But the current financing, again, there's a good size out clause to get out. Now, it's only a two-year deal, and we haven't even been through the first year yet.

So I would have to see something on the table that would be favorable for a longer period of time. Maybe I've got to eat some expenses going out, but if it's not favorable enough to at least make it reasonable over the three years in terms of recovery, then we may work this thing out until it expires. But I'm looking at those possibilities.

Okay. Thank you. Those are my questions.

(Operator Instructions) It appears we have no further questions at this time.

Okay. Well, thank you, everybody. Again, I want to appreciate everybody spending some time on their Monday afternoon to get an update on our third-quarter results, and we look forward to speaking with you all again when we go over our year-end numbers. So thank you, everybody. Take care and have a good rest of your day.

This does conclude today's program. Thank you for your participation. You may disconnect.